Construction Contracts for HOAs

The following items must be in construction contracts:

  1. Commencement date of the work.
  2. Completion date of the work.
  3. The scope of the work/plans and specifications. An explicit and detailed scope of work or carefully drawn set of plans and specifications tells the contractor what he is required to build, and what the association will receive for its money. A less specific description of the project, its elements, and its systems increases the chance that the association will be dissatisfied with the work and will want to change its scope.
  4. Progress payments. Contracts usually provide for progress payments during the course of the work. If the association does not monitor progress payments carefully, payments to the contractor may exceed the value of the work completed up to the date of the payment. It is possible for a contractor to receive payments that so exceed his expenses that he realizes the cost of completing the job exceeds the unpaid amount of the contract price. In such instances, a contractor may walk off the job because he will only lose money if he continues.
  5. Final payment. To make sure the contractor has plenty of incentive to finish the job, the construction contract should provide that the Association retain a portion of the payments due to its Contractor on each progress payment.

It is customary that an owner pays 90% of the Contractor’s invoice approved by the administrator. Upon final payment, it is critical that the association obtain an unconditional final lien release.

  1. Specific duties of the contractor. Many contracts do not specifically describe the scope of services to be provided by a contractor, structural engineer, design professional or consultant.
  2. Insurance. All contractors, structural engineers, design professionals and consultants must maintain certain minimum liability insurance coverage for claims for damages to persons or property that may arise out of the work under any contract whether directly or indirectly caused by the contractor, structural engineer, design professional or consultant or their employees or subcontractors. Also, such insurance coverage should include claims under California Worker’s Compensation law and other employee benefit laws and should name the association and property manager as additional insureds.
  3. Performance bonds. Some associations conclude that they are better off by obtaining a bond from a third party in case the contractor does not have the financial resources to complete the construction work.
  4. Correcting work. In the event the contractor, design professional, structural engineer, or consultant fails to perform their work properly under the terms of any agreement, the agreement should provide that the contractor, design professional, structural engineer, or consultant redo their work at no cost to the association.
  5. Warranties. Reputable contractors provide the association with certain warranties regarding the work and material used under the contract.
  6. Termination of the contract. All contracts should provide specific performance guidelines that, if not met, and after prior notice, will allow the association to terminate the contract.
  7. Changes in the work. It is possible that the scope of work necessary to complete complex construction projects will be altered after the construction process begins. This often occurs because a contractor, design professional or consultant discovers additional damage or reevaluates the best method for repairing the damage which can only be determined after the parties have entered into the original contract. A well-drafted contract should address how changes in the work are evaluated, who is authorized on behalf of the association to approve changes and a mechanism developed for possible changes in price that result from such changes.
  8. Notice provisions. We recommend that a specific provision describing how notices are to be given be included in the contract so that in the event a dispute arises under the contract, and one party desires to terminate the contract, or changes in the work occur, proper and timely notice is given to the parties.
  9. Status of the contractor as an independent party. We recommend that such a provision be clearly stated in the contract.
  10. Dispute resolution. Many associations find it beneficial to include a provision which specifically discusses how any disputes will be resolved. This provision may include a binding arbitration provision or other alternative dispute resolution and establishes the framework for such forums.
  11. Payment of attorney’s fees. Contracts typically include a provision which states that in the event of a dispute between the parties, the prevailing party is entitled to recover all of its reasonable attorney’s fees and costs in connection with resolving such dispute.
  12. Indemnification. We strongly recommend that contracts contain a provision in which the contractor, design professional, structural engineer, or consultant indemnifies and holds the association harmless from all claims and liabilities incurred in connection with the work to be performed under the contract.

The quality of the contractor, design professional, structural engineer, and the consultant is probably more important to the association than the provisions of the construction contract. It will be of little value to try to enforce a contract against a “deadbeat” contractor, design professional, structural engineer, or consultant. We strongly recommend that you obtain good references for your proposed contractor, design professional, structural engineer, and consultant. Their personal integrity is probably the most important component. However, you may also want to determine their financial condition. Some owners request financial statements from their contractors, design professionals, structural engineer, or consultants before executing an agreement.

While most association’s governing documents require the association to obtain at least two bids from reputable licensed contractors, we strongly recommend that all associations obtain multiple bids prior to entering into any contract. Obtaining multiple bids may be the only method that an association has to confirm that the prices quoted by the different contractors, design professionals, structural engineers, and consultants are fair and reasonable and that the scope of the services accurately describes the necessary repair work.

As noted above, there are many issues which should be addressed in a contract between an association and a contractor, design professional or consultant. We are mindful of the fact that the amount of money and the scope of services in such contracts can range from several thousand dollars to multi-million dollar repair contracts. Although all contracts generally raise the same issues as set forth above, the contracts involving significant sums of money or addressing critical initial evaluations of the extent of the damage may require more careful review than smaller contracts involving minor repairs. We strongly recommend that all associations consider evaluating the foregoing issues raised in this letter for each contract submitted by any contractor, design professional, structural engineer, or consultant.

A contract which is properly drafted before work commences will ultimately save the homeowner association significant money and will help address certain problems and issues which may arise during the construction.

Prevent Water Intrusion

Protect Your Property from Water Damage

Water may be essential to life, but, as a destructive force, water can diminish the value of your home or building.  Homes as well as commercial buildings can suffer water damage that results in increased maintenance costs, a decrease in the value of the property, lowered productivity, and potential liability associated with a decline in indoor air quality.  The best way to protect against this potential loss is to ensure that the building components which enclose the structure, known as the building envelope, are water-resistant.  Also, you will want to ensure that manufacturing processes, if present, do not allow excess water to accumulate.  Finally, make sure that the plumbing and ventilation systems, which can be quite complicated in buildings, operate efficiently and are well-maintained. This article provides some basic steps for identifying and eliminating potentially damaging excess moisture.

Identify and Repair All Leaks and Cracks

The following are common building-related sources of water intrusion:

  • Windows and doors: Check for leaks around your windows, storefront systems, and doors.
  • RoofImproper drainage systems and roof sloping reduce roof life and become a primary source of moisture intrusion.  Leaks are also common around vents for exhaust or plumbing, rooftop air-conditioning units, or other specialized equipment.
  • Foundation and exterior walls: Seal any cracks and holes in exterior walls, joints, and foundations.  These often develop as a naturally occurring byproduct of differential soil settlement.
  • PlumbingCheck for leaking plumbing fixtures, dripping pipes (including fire sprinkler systems), clogged drains (both interior and exterior), defective water drainage systems and damaged manufacturing equipment.
  • Ventilation, heating, and air conditioning (HVAC) systems: Numerous types, some very sophisticated, are a crucial component to maintaining a healthy, comfortable work environment. They are comprised of a number of components (including chilled water piping and condensation drains) that can directly contribute to excessive moisture in the work environment.  Also, in humid climates, one of the functions of the system is to reduce the ambient air moisture level (relative humidity) throughout the building. An improperly operating HVAC system will not perform this function.

Prevent Water Intrusion Through Good Inspection and Maintenance Programs

  • Flashings and sealants: Flashing, which is typically a thin metal strip found around doors, windows, and roofs, are designed to prevent water intrusion in spaces where two building materials come together.  Sealants and caulking are specifically applied to prevent moisture intrusion at building joints. Both must be maintained and in good condition.
  • VentsAll vents should have appropriate hoods, exhaust to the exterior, and be in good working order.
  • Review the use of manufacturing equipment that may include water for processing or cooling. Ensure wastewater drains adequately away, with no spillage. Check for condensation around hot or cold materials or heat-transfer equipment.
  • HVAC systems are much more complicated in commercial  Check for leakage in supply and return water lines, pumps, air handlers and other components.  Drain lines should be clean and clear of obstructions. Ductwork should be insulated to prevent condensation on exterior surfaces.
  • HumidityExcept in specialized facilities, the relative humidity in your building should be between 30% and 50%.  Condensation on windows, wet stains on walls and ceilings, and musty smells are signs that relative humidity may be high.  If you are concerned about the humidity level in your building, consult with a mechanical engineer, contractor, or air-conditioning repair company to determine if your HVAC system is properly sized and in good working order. A mechanical engineer should be consulted when renovations to interior spaces take place.
  • Moist areas: Regularly clean off, then dry all surfaces where moisture frequently collects.
  • Expansion joints: Expansion joints are materials between bricks, pipes and other building materials that absorb movement.  If expansion joints are not in good condition, water intrusion can occur.

Protection from Water Damage

  • Interior finish materials: Replace drywall, plaster, carpet and stained or water-damaged ceiling tiles.  These are not only good evidence of a moisture intrusion problem but can lead to deterioration of the work environment, if they remain over time.
  • Exterior Walls: Exterior walls are generally comprised of a number of materials combined into a wall assembly.  When properly designed and constructed, the assembly is the first line of defense between water and the interior of your building.  It is essential that they are maintained properly (including regular refinishing or resealing with the correct materials).
  • Storage Areas: Storage areas should be kept clean.  Allow air to circulate to prevent potential moisture accumulation.

Act Quickly if Water Intrusion Occurs

Label shut-off valves so that the water supply can be easily closed in the event of a plumbing leak. If water intrusion does occur, you can minimize the damage by addressing the problem quickly and thoroughly. Immediately remove standing water and all moist materials, and consult with a building professional.  Should your building become damaged by a catastrophic event, such as fire, flood, or storm, take appropriate action to prevent further water damage, once it is safe to do so. This may include boarding up damaged windows, covering a damaged roof with plastic sheeting, or removing wet materials and supplies.  Fast action on your part will help minimize the time and expense for repairs, resulting in a faster recovery.


Construction Contract Bonds Basics

As the owner of a building under construction, you must be aware of the work, the undertaking of the job, and have confidence that the contractor will be able to finish on time and within budget. Although no one can predict issues that arise and incidents that hold up the schedule, construction contract bonds are there to help. These bonds are issued to the contractor by a corporate surety to provide peace of mind to the building owner.

Before hiring the first contractor that you see online, it is important to ensure that they are capable of doing the job correctly. A successful contractor must have the ‘three Cs’:

  • Character: The contractor should be honest and possess a high degree of integrity.
  • Capacity: The contractor must have the experience and knowledge to complete the job.
  • Capital: The contractor must have access to appropriate amounts of capital to fully fund the project.

The five most common bonds used to secure construction projects are as follows:

  • Bid or Proposal Bonds: A contractor submits a big bond along with the bid on a particular job. This bond then guarantees that the contractor will sign the contract if awarded with the project. The contractor also agrees to furnish all necessary performance and payment bonds.
  • Performance Bonds: This type of bond guarantees that a project will be completed to contract specifications and lien-free if the principal pays the contractor. Therefore, the owner must have enough immediate money to complete the job.
  • Payment Bonds: A payment bond is for the benefit of those supplying labor or materials to a particular construction project. It agrees to compensate the owner for losses because the principle does not pay the suppliers.
  • Maintenance Bonds: Sometimes, a contractor must agree to fix any defects in the workmanship for a period once the project is complete. A maintenance bond guarantees to the project owner that the contractor will meet this obligation.

Completion Bond: Often, a lender who loans out money to a contractor to complete a construction project will require a completion bond. This bond assures the lender of the projects that the job will be carried out without any liens against the property.